Submitted by Taps Coogan on the 5th of June 2019 to The Sounding Line.

Enjoy The Sounding Line? Click here to subscribe.

For anyone who has pondered just how ‘hawkish’ Fed Chairman Jerome Powell really is, I recommend watching his recent speech about the Fed’s review of monetary strategies for the future (embedded at the end of this post).

Mr. Powell spent nearly the entire speech discussing the inevitability of a return to very low or zero interest rates (what he calls the Effective Lower bound or ELB) and other unconventional monetary policy. The future use of these tools is taken for granted to such an extent that, according to him, perhaps we should just start calling them conventional policy.

“…the next time policy rates hit the lower bound – and there will be a next time – it will not be a surprise.“ – Jerome Powell

“Perhaps it is time to retire the term unconventional when referring to tools that were used during the crisis. We know that tools like these will be needed in some form during future ELB spells…” – Jerome Powell

According to Jerome Powell, the greatest monetary challenge of our era is not how to normalize policy, it is the certainty that monetary policy will return to zero, and hence the challenges that will imply for maintaining inflation expectations at 2%.

“It’s time to rethink long-run strategies.” “The proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time” – Jerome Powell

If you ask me what the greatest monetary challenge of our era is, I would say: How will central banks resolve the seemingly intractable problem of overly accomodative monetary policy leading to financial bubbles that are so large that deflating them becomes self-defeating?

Abandon hope if you, like me, suspected that Jerome Powell just might understand that his burden, as Fed Chair, was to be the person to normalize policy in the face of stock market temper tantrums and growth scares because it was the right thing to do for the future of the country.

The Fed is branding its initiative to re-evaluate its monetary policy strategy with “FedListens.” They will be going around the country and ‘listening’ to a range of people’s input on monetary policy and the economy. Ignoring, for a moment, the irony of asking for input on the future of monetary policy as the Fed resigns itself to the failed policies of the past ten years, I have some questions for the Fed:

Doesn’t it dampen inflation expectations when the head of the largest central bank in the world takes it for granted that we will fail to normalize policy and will double dip to the lowest interest rates ever in recorded history?

If everyone knows central banks will keep interest rates at zero, in the process deflecting the need for pro growth structural economic reform, keeping zombie corporations and overcapacity on line, increasing the incentive to over-leverage, and diverting capital to financial markets, why would anyone expect interest rates, productivity, growth, or inflation to rise?

Jerome Powell talks about a return to very low interest rates as though we don’t have them right now. Meanwhile, a near record number of bonds are trading at record negative rates and markets expect the Fed funds rates to be below 2% by the end of the year. The question is not what happens when we go back to zero, the question is will we ever really leave.

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.